"Why does the National Party hate the forestry sector" That was the question posed in Parliament on Friday by Labour's Moana Mackay, Spokesperson for Climate Change Issues. She was speaking during the first reading of the Budget Measures (Miscellaneous Fiscal Matters) Bill which sneaks in an amendment which prohibits forest owners from using Kyoto Units when they remove forest registered under the NZ Emissions Trading Scheme (NZ ETS) and prevents 'reregistration arbitrage'.

It is hard not to agree with Moana Mackay's comment given that the ban only applies to forest owners and not to emitters such as petrol companies who still have another 12 months to purchase cheap foreign carbon credits for as little as 17 cents, primarily sourced from the Ukraine and Russia.

In an ironic twist, the forest industry has been pleading with Government to ban overseas units for years in an effort to save the local carbon price. The NZ ETS was designed under Labour as a finely balanced market with demand from emitters requiring carbon credits to offset emissions broadly matching supply from forest owners awarded New Zealand Units (NZUs) for the carbon absorbed and stored in their forests. Initially the supply and demand fundamentals worked and the price of a forest NZU was $20/unit.

However, in 2010 foreign carbon credits predominantly from China and Eastern Europe began flooding NZ shores. Unlike most other carbon schemes which place restrictions on overseas credits, NZ has left the door wide open. As a result the price of an NZU went from $20 in 2010 to as low as $1.50 in 2013 and last year 95% of the credits handed to Government to meet emission obligations were from overseas.

Another outcome of cheap foreign credits in the NZ ETS is a price arbitrage that some emitters have been exploiting. As the price of carbon collapsed some emitters allegedly continued to charge their customers and consumers an inflated carbon charge and retain the margin as profit. This practice has been well reported in the media.

With the carbon price collapse forest owners have become disillusioned. However, there was a silver lining for the sector. Like the emitters, forest owners could also use Kyoto units to meet surrender obligations. Forest owners could voluntarily leave the scheme and repay to Government the equivalent number of NZUs they had received using cheaper Kyoto units. This also lead to another perverse loophole akin to carbon credit laundering. After leaving the scheme forest owners could re-register and earn NZUs again.

Many forest owners think this loophole is ridiculous and just another symptom of how dysfunctional the NZ ETS has become. The vast majority of forest owners want all Kyoto units banned altogether, and only engaged with the loophole reluctantly. In fact less than 50% of the exiting owners have re-registered and many have no intent of re-registering in the near term given their disappointment with the Government scheme.

The new ban which was passed under urgency on Friday closes the loophole but only to the forest sector. While most of us would agree that the law is justified, the way it has been implemented is inequitable and another 'knock back' for forestry.

First and foremost the ban should apply to all sectors in the NZ Emissions Trading Scheme so that emitters should equally no longer be able to use offshore credits.

Secondly, some forewarning should have been given. The Government has known about the loophole since early 2013 and as recently as December last year confirmed that foreign credits will be able to be used until May 2015 (read here). The shock move last week has caught all in the industry off guard with no consultation and has major fiscal implications for some forest owners who have been caught out. In the past, when the government has banned units there has been consultation and exemptions have been given for parties that already had purchased the banned units.

For more information on how the change impacts post-1989 forest owners read a Q&A here.